ITALIAN PRIME MINISTER TO RESIGN

Italy's centre-left
Democratic Party (PD) leader Matteo Renzi gestures as he appears
as a guest on the RAI television show Porta a Porta (Door to
Door) in Rome January 21, 2014.REUTERS/Remo Casilli

Leaders of Italy's Democratic Party (PD) just concluded a meeting
to decide the fate of the Italian government.

PD secretary and mayor of Florence Matteo Renzi is looking to
unseat current prime minister and fellow party member Enrico
Letta, and he now has the backing of the party in doing so.

Following PD's decision, Letta announced in
a statement that he will tender his resignation to Italian
president Giorgio Napolitano on Friday.

"Mr. Renzi reckons his electoral appeal and his strong support
within the PD make him better equipped to push through the
political, institutional and economic reforms Italy has sorely
needed for a long time," says Nicholas Spiro, managing director
of Spiro Sovereign Strategy.

"This is a high-stakes gamble by Mr. Renzi to force Mr. Letta to
bow out so that he can assume the premiership, push through the
much-needed electoral law and then decide whether it's better to
go to the polls or govern for a few more years."

For markets, however, this likely doesn't mean much.

"It is important to remember that any switch in leadership
is very unlikely to involve the holding of national elections —
indeed given that electoral reforms have still not been passed it
is certainly not in Renzi’s best interests for elections to occur
prior to these happening (as he could also become associated with
the difficulties in passing any reforms)," wrote interest rate
strategists at Rabobank in a note to clients earlier this
morning.

"However, it should be remembered that even
if Renzi does take
over as party leader today he is likely to face many of the same
issues as Letta with regards to making any progress with passing
reforms through the Italian parliament (to do this he needs to
win elections and for this to be certain he needs to first pass
electoral reforms). Thus, although initial thinking would be that
[Italian government bonds] would suffer as a result of the
political uncertainty (and there will likely be a knee jerk
reaction in the short term) we would argue that relatively little
will have actually changed in the bigger picture — again assuming
that the Democratic Party's coalition parties are prepared to
support Renzi as
they did Letta."